Learning how to avoid taxes after retirement cash out is essential in avoiding double taxation. The IRS offers specific guidelines with regards to early retirement’s cash outs. Here are a few things to keep in mind so you don’t lose money.
- Avoid taxes with the IRA rollover. The IRS allows you the chance of cashing out a retirement account if you roll it over into another retirement account. If you left your employer but still have a 401K with that company you can transfer these funds from this account to an IRA. This new account becomes the IRA rollover account. The plan administrator from your former employer is required to help facilitate this process. Another advantage is that you can choose among any of the mutual funds you would like to invest in rather than sticking to the limited choices the employer offered in the 401k. If you cash out your retirement fund and forget to roll it over to another retirement account and have the funds go to you, the IRS will withhold 20% and charge it as ordinary income. In order to get this money back, you will have to replace the entire amount within 60 days. Once you do you can file for a refund, but will have to wait until the end of the year.
- Exemptions to the tax rule on retirement accounts. The IRS allows for certain exemptions to the cash out rule. For example, if you have unreimbursed medical expenses that exceed 7.5% of your income and you are disabled you won’t pay any taxes. You can also use the funds without penalty to fund a college education for your child if cashing out funds from an IRA only.